ECONOMICS OF POLITICAL IMMOBILISM
© 2001, by The Regents of the University of California.
Reprinted from Asian Survey, Vol. 41, No. 1, pp. 164-70, by permission of the Regents
Laos is often called a "forgotten land" because the country is
seldom mentioned in the world press. In 2000, however, Laos divested
itself of this cliché with a wave of mysterious bombings in the capital
Vientiane and elsewhere in the country. No one has been arrested and the
motives of the perpetrators of the bomb attacks, which have injured more
than 40 people, remain something of a puzzle. Whatever the reasons
behind the bombing campaign, the political situation in Laos has become
unstable. Internal strife within the Lao People's Revolutionary Party (the
Pathet Lao, LPRP), the only officially accepted party since the
communist takeover in December 1975, and growing opposition inside and
outside the country to the party's monopoly on political power make
political developments in Laos all the more difficult to foresee.
Economically, after three years of huge macroeconomic instability Laos
saw some recovery in 2000, but the country remains fragile and highly
dependent on foreign assistance. It is therefore not surprising that one
may have noticed much greater involvement of both the donor community
and neighboring countries, in particular Vietnam, in the internal
affairs of the country over the year.
Boiling Cauldron behind Apparent Political Inertia?
The current balance of power among the different groups and individuals
within the LPRP goes back to the changes that took place during the
Sixth Party Congress in March 1996. That Congress strengthened the power
of the party faction opposed to instituting comprehensive and rapid
reforms; it constituted a clear setback for the advocates of economic
reforms. Political developments in Laos since then have cemented the
results of the Sixth Party Congress, accompanied by a gradual
reinforcement of the power of the military network composed of former
and current members of the Lao People's Army. The increased domination
of this network over political life is not that surprising; the absence
of political competition and the weakness of the civil society make it
the only organized, well-structured, and officially accepted
political network outside the LPRP.
Nonetheless, the incapacity shown by the government in how it handled the impact of the regional economic downturn and through its demonstrated macroeconomic mismanagement has led to serious questioning of the legitimacy of the leadership anointed by the Sixth Party Congress. The criticisms have been directed toward the old guard, which gained political legitimacy during the "liberation war" of more than two and a half decades ago.
As a result, the LPRP is experiencing internal strife from a native
version of the struggle between the Ancients and the Modems, pitting the
advocates of political immobilism against those calling for the infusion
of young blood into the top leadership. According to a widely quoted
article in the Far Eastern Economic Review, strife within the party
reflects three (partly) overlapping conflicts, between older and younger
members, between pro-Vietnamese and pro-Chinese factions, and between
Southern and Northern provinces. The same article connects the bombing
campaign to this intra-party struggle, but without any evidence. This
interpretation is questioned by Grant Evans, a Laos expert, who regards
the strife within the party as a struggle for the division of spoils and
the bombings "as simply anarchic, perpetrated by people who are fed
up with the system.". 1
The main representatives of the immobilist group include such
individuals as General Khamtay Siphandon, number one in the party
hierarchy and state president; the prime minister General Sisavath
Keobounphan; and Defense Minister Lieutenant-General Choummaly
Sayasone. Opposing them is a group whose main proponent is Foreign
Minister Somsavat Lengsawat. As yet, the advocates of political
immobilism constitute the majority in the party hierarchy, but a
campaign for power has been launched by the advocates of limited renewal
ahead of the Seventh Party Congress, scheduled for March 2001. The
coming Party Congress will clarify things within the party hierarchy and
provide a better indication of the balance of power between different
groups and individuals. But the congress is unlikely to produce movement
on any political reforms that would threaten the communist regime's grip
on power. That said, evidence of intemal strife in the LPRP could be
seen in the defection of Khamsay Souphanouvong, the minister in charge
of state enterprises and former finance minister, who was given
political asylum in New Zealand in November 2000.
Radical political changes are being advocated by the Laotian opposition
abroad, however, which is spread out over different groups and
continents, ranging from Hmong exiles in the U.S. to royalists in France
and the transnational United Lao National Resistance for Democracy.
Attempts to unify the various anti-government forces took place in
2000 under the auspices of Prince Soulivong Savang, the pretender to the
throne, who lives in exile in France. The main objective of this loosely
organized alliance is to institute a multiparty political system in
Laos. Another objective of the prince and some of his allies is the
restoration of the monarchy. Some Western politicians, mostly
conservatives in the U.S., have shown sympathy for Prince Soulivong's
campaign. Furthermore, an anti-government
Recovering from Macroeconomic Turmoil and De-Linked Growth
Internal strife in the LPRP contributed to crippling the government's
ability to make rapid and clear macroeconomic responses to the economic
turbulence created in the wake of the Asian financial crisis. Not
surprisingly, the Laotian government's poor, opaque, and slow decision
making made the impact of the regional economic downturn on the
macroeconomic situation in Laos considerably worse than it could have
been. An expansive fiscal policy and an accommodating monetary one lay
behind the considerable deterioration of the country's macroeconomic
situation in the late 1990s. Inflation reached 91% in 1998 and 128% in
1999, and the Laotian currency, the kip, lost no less than 90% of its
value (with respect to the US$) between 1997 and late 1999. The
quasi-insolvency of the state-owned domestic banks, which
held a volume of non-performing loans (in particular to
state-owned enterprises) corresponding to some 60% of total loans
in 1999, also contributed to the steep depreciation and flight out of
Since late 1999, though, the macroeconomic situation has improved after the government regained some control over its fiscal policy and instituted a tighter monetary one. The main factors behind the improvement of fiscal policy are larger tax revenues and a contraction of public expenditures. It is worth noting that the decrease in expenditures concerns principally the social sectors, which can be expected to have a negative impact on longer-term growth. The central bank has improved its control of the money supply, having instituted severe restrictions on the credit policy of state-owned commercial banks and increased sales of high‑interest treasury bills to absorb excess liquidity. The main outcome of this improved macroeconomic stance has been a significant decrease in the budget deficit. This also means that there is less need for monetary financing of the deficit, and thus should
eventually lower the inflation rate. The fiscal deficit decreased from
some 13% of the gross domestic product (GPD) in 1997-98 to 8.5% in 1999-2000
(the figures refer to the fiscal year Oct.-Sept.). Inflation has
decreased steadily since late 1999. In 2000, it amounted to some 15% on
an annual basis. However, inflation remains higher than it is in the
countries that are Laos' trading partners, which may eventually result
in a further depreciation of the kip.
Economic growth in Laos is largely de-linked from macroeconomic
imbalances (inflation and exchange rate instability) because of the
dominant position of the subsistence agricultural sector in the economy.
After all, weather conditions matter more than stabilization policy for
agricultural output. Long-term GDP growth in Laos ranges between 6% and
7%; the average growth rate for industry and services was above this
range and below it for agriculture. It is known that official statistics
overestimate agricultural production and growth, which means that actual
GDP is lower than 6-7%.
Macroeconomic mismanagement and instability produced by the regional
economic problems brought down the growth rates of industry and services
but left the rate of agricultural growth relatively unchanged. Part of
the réduction in the growth rates of industry and services could bc
ascribed to the sharp drop in foreign direct investments. On the other
hand, relatively favorable weather conditions in 1999 had contributed to
boosting agricultural production by sonie 8% as compared to 1998, with
the largest increase coming in rice production. In 2000, though,
agricultural performance again worsened, this time as a result of
serious floods in thé central and southern provinces in September and
October. The floods affected some 10% of the Laotian population at a
critical time in thé rice-growing season. Growth in industry and
services did recover somewhat in 2000, however, with foreign investments
gradually coming back.
The spatial distribution of growth is critical a factor in the development of regional economic disparities that can exacerbate social, ethnie, and political tensions. National income in Laos is unevenly distributed among the provinces and different types of households. Economic reforms introduced in the 1990s contributed to a widening of income disparities across provinces and resulted in a rapid increase of real incomes in urban areas and the provinces of Vientiane Municipality, Champasack, and Xaboury.3 For example, the average income per capita in Vientiane Municipality was twice that of Laos as a whole in 1997-98, while it had been only 1.5 times higher in 1992-93. The worsening of the economic situation in the late 1990s mostly affected the urban population, in particular state employees, who were most dependent on imported goods and whose real incomes dropped dramaticallywith hyperinflation and the huge fall in the value of the kip. On the other hand, there are indications that the kip's depreciation has boosted exports of agricultural products to Thailand and improved living conditions in districts with road access to that country and the Mekong River. All this suggests that the income disparities between urban and rural areas might have decreased somewhat over the past two to three years, but at much lower levels in terms of per capita incomes as measured in foreign currency.
The political immobilism and poor macroeconomic policy contributed to a
clear deterioration of the economic and social situation in Laos in the
late 1990s. Strife within the LPRP created a kind of leadership vacuum,
which was rapidly filled by powerful neighboring countries in order of
influence, Vietnam and China. After the army, the main support for the
current Laotian political leadership now cornes from such neighbors,
though the importance of foreign aid makes the donor community a
critical factor in the support of the political leadership as well.
Vietnam's role in Laos has expanded tremendously in military, economic, and political areas in recent years. The Laotian government sought Vietnamese intervention to face an escalation of the Hmong rebellion in the northeastern province of Xiang Khouang. Vietnamese troops were involved in the operation, though the Laotian government denied this. Vietnam's economic ties with Laos also have increased notably over the past few years. This can bc seen in the deeper cooperation between border provinces; a stepping up of crossborder and barter trade; Vietnamese investment in such strategic sectors as construction, transport infrastructure, forestry, and agro-processing; joint-venture agreements in the banking sector; financial and auditing assistance; and the outflow of Vietnamese workers to Laos (some 10,000 in 1999). Last, but not least, political and ideological solidarity has been on the increase. For example, Vietnam constructed a pharaonic mausoleum in honor of former president Kaysone Phomvihane just outside Vientiane, while ideological training of Laotian officials has been organized by the Ho Chi Minh National Politics Institute in Hanoi. Plenty of other examples of Vietnamese-Laotian solidarity can be found almost daily on the front page of the semi-official Vientiane Times.
The increase in China's influence, which has been more modest and often
limited to economic matters, seems to be part of that country's natural
economic expansion toward Southeast Asia. But China also wants to use
economic cooperation to balance the influence of Vietnam and achieve
political goals, not least since Laos has become a member of ASEAN. China
donated $7.2 million to build a grandiose Laotian cultural center in
Vientiane and provided Laos with interest-free loans to help stabilize the
kip. Also, Chinese construction firms have been engaged in infrastructure
projects in northern Laos. And to make the Chinese brotherhood more complete,
President Jiang Zemin paid the first-ever visit of a Chinese head of state
to Laos in mid-November 2000, during which he promised still more economic
aid to the country.
As for the influence of the donor community, it is not that imposing but is real nonetheless because of the economic importance of foreign aid. Official development assistance (ODA) increased during the 1990s and now represents 17%-20% of GDP. Part of the increase can be ascribed to the depreciation of the domestic currency, given the level of aid in foreign currency. Note, however, that the structure of ODA has changed, with grants accounting for a smaller share and loans for a larger one. This change has implications for the future development of external debt. ODA finances some 80% of public investments, which is a considerable share. The highest degrees of aid dependency (the foreign aid share of investment expenditures) are found in transport and communications (more than 90%) and public health and social welfare (some 80%). Together, these sectors account for some 80% of the total development assistance to Laos. The main foreign donors are Japan, Australia, Germany, Sweden, France, and the European Union (EU). The donor community has from time to time expressed concerns over human rights abuses and the Laotian government's secrecy. Yet the donors have been reluctant to make full use of their economic influence to promote transparency and aid efficiency‑that is, good governance-and wean Laos away from its mentality of aid dependence. Both the meeting between the donor countries and the Laotian authorities in November and the ASEAN-EU ministerial meeting in Vientiane in December confirmed this contention.
As noted above, the
Seventh Party Congress is to be held in Vientiane in March 2001. It is
likely to modify slightly the balance of power among individuals, factions,
and provinces within the top leadership of the LPRP. But the congress is
unlikely to reform the political system as such and empower Laos' policy
makers with the legitimacy and instruments that would permit them to regain
control over longer-term development strategy.
1 "Behind the Bombings," Far Eastern
Economic Review, July 27, 2000; and Grant Evans, "Demoralisation
but No Revolt in Laos",
The Nation (Bangkok), August 16, 2000. 3 See Yves Bourdet,
"Laos: An Episode of Yo-Yo Economics," Southeast Asian Affairs
2000 (Singapore: Institute
of Southeast Asian Studies,
2000) pp. 157-59.
As noted above, the Seventh Party Congress is to be held in Vientiane in March 2001. It is likely to modify slightly the balance of power among individuals, factions, and provinces within the top leadership of the LPRP. But the congress is unlikely to reform the political system as such and empower Laos' policy makers with the legitimacy and instruments that would permit them to regain control over longer-term development strategy.
1 "Behind the Bombings," Far Eastern Economic Review, July 27, 2000; and Grant Evans, "Demoralisation but No Revolt in Laos", The Nation (Bangkok), August 16, 2000.2 For an analysis of macroeconomic instability in relation to the transition process, see Yves Bourdet, The Economics of Transition in Laos: From Socialism to ASEAN lntegration (Cheltenham and Northampton, England: Edward Elgar, 2000).
3 See Yves Bourdet,
"Laos: An Episode of Yo-Yo Economics," Southeast Asian Affairs
2000 (Singapore: Institute
of Southeast Asian Studies,
2000) pp. 157-59.